Deeply Troubling Federal Budget Numbers Add to Economic Worries

By SBE Council at 17 October, 2023, 7:08 pm

Economic Insider Special Report

by Raymond J. Keating –

(As an optimist at heart, I don’t like writing pieces like this. But I’m also a realist, and the data is the data, and economics is economics, so here goes…)

The federal budget has moved into territory previously unknown in U.S. history, and it raises grim questions for our economy.

The latest Monthly Budget Review from the Congressional Budget Office (CBO) reported on fiscal year 2023, which just closed at the end of September.

Let’s look at the basics first. Federal government outlays registered a breathtaking $6.13 trillion in FY2023. Amazingly, that was down a tad from $6.27 trillion in FY2022. Meanwhile, federal government receipts came in at $4.44 trillion. And that was down from $4.9 trillion in FY2022. That tallies up to a federal budget deficit of $1.69 trillion in FY2023, up from $1.38 trillion in FY2022.

What’s with the decline in government revenues? CBO speculates: “One factor may be smaller collections of taxes on capital gains and other types of income; another may be higher-than-anticipated claims of the Employee Retention Tax Credit, which reduces receipts and, where refundable, increases outlays for U.S. Coronavirus Refundable Tax Credits (discussed in the section on total outlays).”

Traditionally, a notable decline in government revenues means that the economy did not perform as well as expected.

As for the slight decrease in outlays, much of that was attributable to one-time particularities, such as timing, pandemic-related issues, and the administration’s student loan forgiveness program getting tossed out by the Supreme Court. But note that Social Security spending increased by 11 percent, Medicare by 18 percent and interest on public debt by 33 percent.

Meanwhile, total federal government debt stands at approximately $33 trillion.

To put that in some perspective, U.S. GDP came in at $27.1 trillion in the second quarter of this year. So, federal debt outstanding registers at roughly 122 percent of GDP, which compares to 55 percent in 2001.

All of this is grim, but matters get worse when you look at projections of federal spending as a share of GDP in the latest budget from the administration.

Consider that in pre-pandemic FY2019, federal outlays came in at 21.0 percent of GDP. Now, that was high, especially when compared to the 17.7 percent at the close of the Clinton years in 2000.

With the onset of the pandemic, federal outlays naturally jumped as a share of GDP (with more spending and a major recession). Federal outlays hit 31.1 percent in FY2020, and then gradually declined to an estimated 24.2 percent of GDP in FY2023. But federal spending is projected to stay above 24.5 percent going forward (estimated at 25.3 percent in 2024, 24.9 percent in 2025, 24.6 percent in 2026, 24.6 percent in 2027, and 24.9 percent in 2028). At least, those are the projections from the Biden OMB.

This level of peacetime spending for such an extended period is completely unprecedented in U.S. history. And whether we’re talking about taxes or debt, it must be recognized that these measures, i.e., taxes and borrowing, are completely dependent upon government spending. And let’s be clear: government spending stifles economic opportunity and growth by draining resources away from the private sector, whether via taxes or borrowing.

Of course, the current and future expected levels of debt serve as a kind of double hit, as resources are siphoned from the private sector now via borrowing, and then again, if you will, in the future if taxes are increased to pay for rising debt service.

None of this points to good news for the U.S. economy now or into the future. Multiple policy factors have been weighing on our economy, with resulting under-performing growth, including current tax burdens, looming tax increases, mounting regulatory burdens, further proposed increases in regulation, protectionist trade policies, and failure to implement welcoming immigration policies. On top of all of this are out-of-control government spending levels, and related rising debt levels.

Indeed, rising government spending and debt levels can be the most insidious anti-growth policies. Policymakers and voters tend not to notice the resulting problems, and then extremely hard choices are required to get policy and the economy back on the right track. As history shows from other nations, more often than not, those hard choices are avoided, and economic decline is accepted as a result.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.